How do you incorporate a company's excess cash and non-operating assets into a valuation?
A core Valuation interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
In a DCF, you project only operating cash flows, so the terminal value and present value of FCFF yield the enterprise value of operations. Then you add the value of excess cash (cash not needed for operations) and other non-operating assets (like marketable securities, real estate held for investment, or equity stakes) to get total enterprise value. Conversely, subtract non-operating liabilities. Finally, subtract net debt to get equity value. This ensures you don't double-count or miss value from non-core assets.
WHAT INTERVIEWERS LISTEN FOR
- ✓DCF gives operating enterprise value
- ✓Add excess cash and non-operating assets
- ✓Subtract non-operating liabilities
- ✓Subtract net debt to get equity value
COMMON MISTAKES
- ✗Forgetting to add excess cash
- ✗Including operating cash in excess cash
- ✗Double-counting non-operating assets already in projections
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